Purchase-Money Mortgage
A purchase-money mortgage is a loan that the seller of the property issues to the buyer. It is often referred to as seller financing, seller carry-back or owner financing. In this agreement, the seller takes the role of the bank, offering to finance all or a portion of the cost to purchase the home. The buyer pays back the seller in monthly installments, as they would a traditional lender. However, they typically have a higher interest rate than they would have if they went to a bank.
What is the advantage of a purchase-money mortgage?
For the buyer, they often obtain more financing than they would get from a traditional lender. The seller benefits from a purchase-money mortgage as they continue to receive monetary payments in addition to the sale price of their home.
Features
The seller of the home holds a note for the purchase price of the home. They use the note as a lien against the property. This helps to ensure repayment of the loan. If there is already an institutional mortgage on the home, the purchase-money mortgage acts a second mortgage. In this case, the first lender’s mortgage must be paid off before the purchase-money loan.
Considerations
A purchase-money mortgage may be more popular in a buyer’s market when there are more homes than there are buyers. In this case, a seller must find a way to differentiate themselves from the rest of the market. This might be especially important if the seller needs to sell their home due to unfavorable circumstances such as job loss, relocation, or divorce.
A buyer who cannot obtain financing because of low income or poor credit history may need help from the seller to purchase the home.
Risks
Since the seller holds the note, they must ensure the home is properly insured. Additionally, they must ensure that the home remains in good condition should the home need to be repossessed and placed back on the market.
A buyer can run the risk of losing the home, just as they would’ve if they obtained financing through a traditional means (such as a bank) if they fail to keep up the payments.
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